Executive Compensation

02/11/2016

Recently, the Rock Center for Corporate Governance at Stanford University conducted a nationwide survey of 1,202 individuals — representative by gender, race, age, political affiliation, household income, and state residence — to understand public perception of CEO pay levels among the 500 largest publicly traded corporations. Key takeaways are:

– CEOs are vastly overpaid, according to most Americans– Most support drastic reductions– The public is divided on government intervention

74 percent of Americans believe that CEOs are not paid the correct amount relative to the average worker. Only 16 percent believe that they are. While responses vary across demographic groups (e.g., political affiliation and household income), overall sentiment regarding CEO pay remains highly negative.

This part doesn’t surprise me – but it’s still pretty amazing:

Public frustration with CEO pay exists despite a public perception that CEOs earn only a fraction of their published compensation amounts. Disclosed CEO pay at Fortune 500 companies is ten times what the average American believes those CEOs earn. The typical American believes a CEO earns $1.0 million in pay (average of $9.3 million), whereas median reported compensation for the CEOs of these companies is approximately $10.3 million (average of $12.2 million).2

Responses vary based on the household income of the respondent, but all groups underestimate actual compensation. Lower income respondents (below $20,000) believe CEOs earn $500,000 ($9.7 million average), while higher income respondents ($150,000 or more) believe CEOs earn $5,000,000 ($14.9 million average).

But are the American people sufficiently populist to support government intervention? Here the results are mixed:

In terms of a solution, approximately half of respondents (49 percent) believe the government should do something to change current CEO pay practices, approximately one-third (35 percent) do not believe the government should intervene, while the remainder have no opinion.

Higher income respondents (38 percent) are much less likely to favor government intervention than middle income (55 percent) and lower income (52 percent) respondents. Republicans and Independents (36 percent and 47 percent, respectively) are also less likely to favor government intervention than Democrats (60 percent).

Given the rising tide of Democrats who are okay with socialism, I suppose it's not surprising that they tend to favor statist solutions. But what I'd really like to have seen is a break down not just by political affiliation and income, but by age. After all, aren't you curious to know if millennials really have all fallen for Bernie Sanders' style of class warfare?

02/03/2016

This paper examines the impact of enhanced executive remuneration disclosure rules under UK regulations introduced in 2013 on the voting pattern of shareholders. Based on a hand-collected dataset on the pay information disclosed by FTSE 100 companies, we establish that shareholders guide their vote by top line performance, and appear to disregard the remaining substantial body of information provided to them.

Mercenary bands were corporate in structure. The captain stood at the head of his brigade in a manner similar to the way a modern CEO stands at the head of his firm. When the captain decided to leave, the company did not disband but retained its name and elected another man. (Kindle Locations 1511-1513).

And here's a really interesting fact about those companies: the most famous and successful condottieri got paid a very substantial multiple of what the common soldiers made.

The famous Italian mercenary Giovanni d’Azzo deli Ubaldini earned an impressive salary of 500 florins a month in Sienese service in 1381. But his cavalrymen earned only 6 florins a month .... (Kindle Locations 1665-1667).

Granted, a multiple of 83 to 1 is lower than the multiple earned by many of today's top CEOs. But it's still a very dramatic difference.

What's going on here? There are two basic theories of executive compensation: managerial power and arms'-length bargaining:

The so-called principal-agent problem arises because agents who shirk do not internalize all of the costs thereby created; the principal reaps part of the value of hard work by the agent, but the agent receives all of the value of shirking.

Although agents thus have strong ex post incentives to shirk, they have equally strong ex ante incentives to agree to contractual arrangements designed to prevent shirking.Wherever a principal-agent problem is found, we thus expect to see a mixture of carrots and sticks designed to constrain shirking. The sticks include ex post sanctions, up to and including dismissal. The carrots include incentives that align the agent's interests with those of the principal.

...

In theory, these divergences in interest can be ameliorated by executive compensation schemes that realign the interests of corporate managers with those of the shareholders.

In the arms'-length model, "compensation schemes are claimed to be 'the product of arm's-length bargaining' between managers 'attempting to get the best possible deal for themselves and boards seeking to get the best possible deal for shareholders.' As a result, financial economists loyal to the arm's-length-bargaining model assume compensation schemes are generally efficient, while courts generally defer to decisions by the board of directors." Id. at 1623.

In contrast, the managerial power model claims that:

... boards of directors--even those nominally independent of management--have strong incentives to acquiesce in executive compensation that pays managers rents (i.e., amounts in excess of the compensation that management would receive if the board had bargained with them at arm's length). The first of these incentives flows from the fact that directors often are chosen de facto by the CEO. Once a director is on the board, pay and other incentives give the director a strong interest in being reelected; in turn, due to the CEO's considerable influence over selection of the board slate, directors have an incentive to stay on the CEO's good side. Second, Bebchuk and Fried argue that directors who work closely with top management develop feelings of loyalty and affection for those managers, and they become inculcated with norms of collegiality and team spirit that induce directors to go along with bloated pay packages. (Id. at 1624-25)

...

The net effect of managerial power is that CEO pay packets are higher than would obtain under arm's-length bargaining and less sensitive to performance. (Id. at 1626.)

A condottieri's pay ought to be the product of arms'-length bargaining rather than managerial power. In the first instance, the condottieri's pay is set in the condatta (the contract between the city-state employer and the condottieri), which presumably is negotiated more or less at arms' length (of course, the condottieri has a considerable degree of bargaining power in the form of the military band at his disposal).

In the second, unlike public corporations where the owners of the business are dispersed and relatively powerless, the condottieri is elected by his employees. In theory, employee ownership should obviate the agency cost problem that drives up CEO pay.

Interestingly, however, the modern evidence suggests that employee owned enterprises should have much lower ratios of CEO to worker pay. In the famous Mondragon cooperative, the permissible ratio of the highest paid to lowest paid employee has gradually risen but only to 8.91 to 1. (Jones, D. C. 2013. The Ombudsman: Employee Ownership as a Mechanism to Enhance Corporate Governance and Moderate Executive Pay Levels. Interfaces, 43(6): 599-601.)

Why then did the condottieri's pay so greatly exceed that of the common soldier? One likely explanation is the tournament theory of executive compensation.

As the story goes, tournaments are a mechanism for reducing agency costs by providing incentives through “comparative performance evaluation.” In a promotion tournament, the principal ranks its agents by their performance relative to one another. The best performing agents are promoted to positions with higher pay and/or status.

Stephen M. Bainbridge, The Tournament at the Intersection of Business and Legal Ethics, 1 U. St. Thomas L.J. 909, 911 (2004). (Draft available here.)

Caferro's book offers some support for this hypothesis:

The pay structure provided obvious financial incentive for cavalrymen and officers to seek advancement to the leadership of companies. (Kindle Locations 1673-1674).

But why would the common soldier tolerate the vast disparity in pay? What did the common soldier get out of working for a condottieri who made more than 80 times what he did? Interestingly, Caferro informs us that:

There was surprisingly little connection between the wages of cavalrymen and those of the captains for whom they worked. Service for a renowned mercenary did not result in higher pay. The famous Italian mercenary Giovanni d’Azzo degli Ubaldini earned an impressive salary of 500 florins a month in Sienese service in 1381. But his cavalrymen earned only 6 florins a month, the same as those in the employ of the obscure mercenary Riccardo Dovadola, whose own monthly stipend was 24 florins.

But it turns out that soldiers in the mercenary companies were not paid by salary alone:

The appeal of working for a well-known captain lay in his ability, through victories, to bring earnings beyond salaries in the form of spoils of war and, perhaps, through his reputation, to increase the likelihood that an employer would pay wages he promised. (Kindle Locations 1664-1669).

So it turns out that the winner of the tournament does have coattail effects on those below him in the hierarchy.

I'm not sure if this has anything to do with modern corporation CEO pay, but it does suggest new ways of thinking about CEO pay in workers cooperatives, employee-owned corporations, and maybe even law firms.

This essay argues that regulatory reforms introduced by the Dodd-Frank Act of 2010 in the area of executive compensation have not yet achieved their purpose of linking executive pay with company performance. The rule on shareholder say-on-pay appears to have had limited success over the five proxy seasons since its adoption. The rule on pay ratio disclosure, adopted in August 2015, and the rules on pay-versus-performance disclosure and the clawback of certain incentive compensation, proposed in April 2015 and July 2015, respectively, are also unlikely to succeed. For the most part, the rules are intuitive and well-intentioned, but a closer look reveals that they are easy to manipulate, counterproductive, and often interact with one another, and with other regulatory goals, in unintended ways. As a result, five years after the passage of Dodd-Frank, the decades-old goal of aligning pay with performance remains elusive.

My friend Loyola law professor Mike Guttentag recently sent me a reprint of his article On Requiring Public Companies to Disclose Political Spending, 2014 Colum. Bus. L. Rev. 593 (2014), which reminded me that I wanted to flag it for my readers. It is, put simply, the single best thing I've read on corporate political contribution disclosure.

Here's the abstract:

Mandatory disclosure is a central feature of securities regulation in the United States, yet there is little agreement about how to determine precisely what public companies should be required to disclose. This lack of consensus explains much of the disagreement about whether the Securities and Exchange Commission should require public companies to disclose political spending.

To resolve the political spending disclosure debate I therefore begin by considering the more general question of how to evaluate any proposed mandatory disclosure requirement. I show why the presumption should be against adding a new disclosure requirement, and then identify the kinds of evidence that should be sufficient to overcome this presumption. Applying this new analytic framework to the political spending disclosure debate—and basing this analysis in part on previously unpublished empirical findings—shows that public companies should not be required to disclose political spending.

Here's a link to the the law review page from which you can download the article.

08/12/2015

Occasionally activists in the CEO pay wars show their hand honestly. Their goal is not to change CEO pay practices so much as flog eternal outrage over CEO pay for political purposes.

Under a Dodd-Frank rule finally imposed last week, activists have succeeded in forcing the Securities and Exchange Commission to force companies to compute a ratio showing the CEO’s pay in relation to the median worker’s, an arbitrary and uninformative mathematical exercise of no value to investors, just like the last such effort, and destined to have the same effect: zero.

So why bother? Jenkins explains:

Thirty-five years into the CEO pay boom, it’s hard to sustain outrage based on mere resentment. And yet the cause has morphed into a perma-cause for certain journalists, think tankers and labor lobbyists because executive compensation has become a piece of the chorus of grievance that’s supposed to make sure liberals get elected.

Jenkins left out the academic enablers who provide the activists with purportedly objective, nonpartisan cover, but otherwise he's right on target.

08/10/2015

How, exactly, will this “simple benchmark” help investors do those things? What number, or range, for this ratio tells an investor that a company is treating its average workers well or poorly, or that a company is paying its CEO reasonably? What economic or financial standards can be created using this or other data to enable investors to figure these things out?

It's hard to argue with Hodak's view that "the SEC is simply being used in an experiment in social engineering." It's equally hard to argue with his conclusion that the experiment will fail, as have so many before.

08/09/2015

Why do you notice the splinter in your brother’s eye, but do not perceive the wooden beam in your own eye? How can you say to your brother, ‘Let me remove that splinter from your eye,’ while the wooden beam is in your eye? You hypocrite, remove the wooden beam from your eye first; then you will see clearly to remove the splinter from your brother’s eye.

A few weeks ago, CalPERS’ Director of Corporate Governance, Anne Simpson, sent a letter to the Securities and Exchange Commission in support of the SEC’s proposed pay for performance disclosure rule. Her letter notes CalPERS’ belief that “Compensation of executives in publicly listed companies should be driven predominantly by performance.” ...

As noted last week, CalPERS’ Chief Investment Officer is California’s highest paid civil servant (excluding the UC system). According to the Sacramento Bee’s state worker salary database, the CIO’s total pay for 2014 was $745,000, up over 36% from $547,000 for the year before. According to Pensions & Investments, CalPERS is reporting preliminary and very anemic investment returns of 2.4% for its fiscal year ended June 30. According to the same article, this is 5.1% below CalPERS’ assumed return.

In another post, Bishop takes a look at pay inequality at CalPERS and finds still more hypocrisy.

07/23/2015

My colleagues Steven Bank and George S. Georgiev teach executive compensation and corporate governance at the University of California, Los Angeles School of Law and are affiliated with UCLA’s Lowell Milken Institute for Business Law and Policy. They've got an op-ed in The Globe and Mail on how the SEC's new executive compensation rules will affect not just USA but also Canadian corporations:

The primary U.S. market regulator, the Securities and Exchange Commission, served up ... far-reaching rules on bonuses and other incentive-based compensation for all firms listed on U.S. stock exchanges, which include about 300 of Canada’s best-known multinational companies as well as more than 600 other international companies. This was a curious choice since the United States has traditionally allowed non-U.S. companies to follow their home-country rules on executive compensation and corporate governance instead of the SEC’s rules.

Even worse than the geographic overreach, however, is the fact the SEC’s new rules are likely to prove expensive, counterproductive and easy to manipulate. ...

Unlike U.S. companies, Canadian and other international companies have an even easier way out. They can simply choose to delist from U.S. exchanges and rely solely on their home-market listing. In fact, many non-U.S. companies did just that when they were faced with complex new corporate governance rules under the Sarbanes-Oxley Act in the wake of the Enron and WorldCom scandals of the early 2000s. Studies show that a U.S. listing confers advantages on non-U.S. companies, but the burden from the new rules may well outweigh these advantages, especially at a time when international markets are becoming increasingly competitive.

Of course, this is just one more example of the general phenomenon of which I wrote in Corporate Governance and U.S. Capital Market Competitiveness (October 22, 2010). Available at SSRN: http://ssrn.com/abstract=1696303:

During the first half of the last decade, evidence accumulated that the U.S. capital markets were becoming less competitive relative to their major competitors. The evidence reviewed herein confirms that it was not corporate governance as such that was the problem, but rather corporate governance regulation. In particular, attention focused on such issues as the massive growth in corporate and securities litigation risk and the increasing complexity and cost of the U.S. regulatory scheme.

Tentative efforts towards deregulation largely fell by the wayside in the wake of the financial crisis of 2007-2008. Instead, massive new regulations came into being, especially in the Dodd Frank Act. The competitive position of U.S. capital markets, however, continues to decline.

This essay argues that litigation and regulatory reform remain essential if U.S. capital markets are to retain their leadership position. Unfortunately, the article concludes that federal corporate governance regulation follows a ratchet effect, in which the regulatory scheme becomes more complex with each financial crisis. If so, significant reform may be difficult to achieve.

06/08/2015

In Calma v. Templeton, the Delaware Chancery Court recently denied a motion to dismiss a lawsuit brought by shareholders against Citrix Systems and its directors which alleged that Citrix’s directors had breached their fiduciary duties by paying the company’s non-employee directors excessive compensation from 2011 through 2013. The key holding of the decision is that Delaware’s “business judgment” rule, which affords directors of Delaware corporations discretion in making business judgments and substantial insulation from liability for their judgments, did not apply in the case because the directors were “interested” in the transaction, which therefore required that their decisions be reviewed under the substantially more demanding “entire fairness” standard. The Court also held that the board’s compensation decisions were not “ratified” by the company’s shareholders, notwithstanding that the shareholder-approved “omnibus equity” plan under which their equity was awarded contained conventional (and very high, IRC Section 162(m) driven) limits on the amount of equity that could be awarded to any individual in a single year, because the limits were not “meaningful.” In our Latham & Watkins Commentary, Director Compensation after Calma v. Templeton: Proactive Steps to Consider, we analyze the Calma decision and describe steps that companies should consider taking in the wake of the decision.

In the blog post, Jim goes on to offer a number of thoughts on the decision's impact. Recommended reading.

05/07/2015

Over the past twenty years there has been a dramatic increase in both CEO pay and the wealth of the richest Americans. We examine three hypotheses regarding the relationship between wealth inequality and CEO compensation: first, that the increase in CEO income inequality helped cause increased wealth inequality; second, that increases in wealth inequality helped cause increased CEO income inequality; and third, that both types of inequality are caused by a third factor. We test these hypotheses by using ExecuComp and Forbes 400 data to estimate power law distributions and compare the behavior of these distributions over time. We find no support for any of the three hypotheses.

04/27/2015

So, why have the reforms been so ineffective? Indeed, they have targeted the wrong things. Say-on-Pay was based on the mistaken belief that the root cause of high CEO pay was poor oversight by boards and investors. What we are seeing can easily be concluded as proof that boards are not lazy, stupid, or corrupt, and that investors–a very large and diverse crowd–are getting pretty much what they pay for, and they know it.

12/03/2014

In 2015 the Securities and Exchange Commission is expected to finalize a new rule that imposes excessive compliance costs on public companies with no discernible benefits to investors. The rule requires that public companies calculate and disclose the ratio of the CEO’s pay to the median annual total compensation of all company employees. Part of the 2010 Dodd-Frank law, this ill-advised rule clearly advances the agenda of interest groups worried about income inequality, politicizes the SEC’s disclosure regime and is inconsistent with the purpose of federal securities laws. ...

The pay-ratio rule is an attempt to shame companies and their boards to advance the “social justice” goal of more equitable income distribution. It comes with a high price tag: Complying with the pay-ratio rule will require the private sector to spend $710.9 million and 3.6 million hours a year, according to a recent report by the Center for Capital Markets Competitiveness.

11/18/2014

In a recent WSJ column, Lisa Rickard did a great job analyzing the decision Delaware's legislature will sonn face with respect to fee shifting bylaws:

Specifically, the controversy hinges on whether a company can adopt bylaws allowing it to claw back some of its legal costs if plaintiffs lawyers bring an abusive shareholder lawsuit and lose in court. ...

The debate over fee shifting was ignited in May, after ATP Tour Inc., the Delaware-incorporated company that oversees men’s professional tennis, tried to enforce a fee-shifting provision in its bylaws after it won a lawsuit brought by members challenging changes to the tour schedule and format. The Delaware Supreme Court ultimately determined that ATP was within its rights to adopt the provision under state law.

Weeks after the court’s ruling, the Delaware legislature, cheered on and supported by the powerful state plaintiffs bar, attempted to pass a law “fixing” the Delaware Supreme Court’s decision. Far from a fix, the bill would have outlawed a company’s ability to use the fee-shifting tool to protect itself against frivolous litigation.

Loud protests from national, state and local business groups, as well as individual companies caused the legislature to rethink its approach. But the legislature hit only the pause button, asking the Delaware Bar’s leadership to “study” the matter this fall before recommending to the legislature a revised provision to be considered early next year.

In an earlier post, I made the case that the Delaware legislature ought to authorize and validate fee shifting bylaws. But will it?

In this post, I view the problem through a public choice lens. As I see it, there are two questions: (1) What's in the state of Delaware's best interest? (2) What's in the best interest of the key interest group that would be affected by fee shifting bylaws? As we'll see, I think those questions have different answers. Predicting what Delaware will decide is thus quite difficult.

The Legislature's Incentives to Preserving Delaware's Dominance

Back in the nineteenth century state corporation laws gradually moved in the direction of increased liberality, making the incorporation process simpler on the one hand, while at the same time abandoning any effort to regulate the substantive conduct of corporations through the chartering process. In later years, this process became known as the “race to the bottom.”[1] Corporate and social reformers believed that the states competed in granting corporate charters. After all, the more charters (certificates of incorporation) the state grants, the more franchise and other taxes it collects. According to this view, because it is corporate managers who decide on the state of incorporation, states compete by adopting statutes allowing corporate managers to exploit shareholders.

Many legal scholars reject the race to the bottom hypothesis.[2] According to a standard account, investors will not purchase, or at least not pay as much for, securities of firms incorporated in states that cater too excessively to management. Lenders will not make loans to such firms without compensation for the risks posed by management’s lack of accountability. As a result, those firms’ cost of capital will rise, while their earnings will fall. Among other things, such firms thereby become more vulnerable to a hostile takeover and subsequent management purges. Corporate managers therefore have strong incentives to incorporate the business in a state offering rules preferred by investors. Competition for corporate charters thus should deter states from adopting excessively pro-management statutes. The empirical research appears to bear out this view of state competition, suggesting that efficient solutions to corporate law problems win out over time.[3]

Whether state competition is a race to the bottom or the top,[4] there is no question that Delaware is the runaway winner in this competition. More than half of the corporations listed for trading on the New York Stock Exchange and nearly 60% of the Fortune 500 corporations are incorporated in Delaware. Proponents of the race to the bottom hypothesis argue that Delaware is dominant because its corporate law is more pro-management than that of other states. Those who reject the race to the bottom theory ascribe Delaware’s dominance to a number of other factors: There is a considerable body of case law interpreting the Delaware corporate statute (DGCL), which allows legal questions to be answered with confidence. Delaware has a separate court, the Court of Chancery, devoted largely to corporate law cases. The Chancellors have great expertise in corporate law matters, making their court a highly sophisticated forum for resolving disputes. They also tend to render decisions quite quickly, facilitating transactions that are often time sensitive.[5]

Whether one thinks Delaware’s dominance is because the state is winning the race to the top or the race to the bottom, there is no doubt that Delaware benefits significantly from its dominance. Delaware does get an astonishing percentage of state revenues from incorporation fees and franchise taxes. In some years, Delaware's annual revenues from these sources constitute up to 30% of the state's budget – an estimated equivalent of $3,000 for each household of four in the state. Given the importance of franchise taxes and other corporate fees to Delaware’s budget it would be surprising if such competition did not suffice to keep Delaware on its toes. If Delaware isn’t racing, it is at least fast walking.

… while the Delaware legislative initiative is on hold, at least one legislature has gone forward to provide for the awarding of fees against unsuccessful derivative lawsuit claimants. ...

... the “loser pays’ model that the Oklahoma legislation adopts is extraordinary — It represents a significant departure from what is general known as the American Rule, under which each party typically bears its own cost. And unlike the fee-shifting bylaws being debated in Delaware –which would in any event require each company to decide whether it was going to adopt the bylaw (and might therefore be subject to shareholder scrutiny) — the Oklahoma legislation applies to any derivative action in the state, even if the company involved is not an Oklahoma corporation.

If more states follow Oklahoma's lead, Delaware's need to remain at the forefront of corporate law may be enough to overcome the self-interested lobbying by lawyers (both defense and plaintiff) who hate loser pays.

John Coffee has similarly observed that a ban by “Delaware might fuel an interjurisdictional competition, as other, more conservative states (think, Texas) might seek to lure companies to reincorporate there to exploit their tolerance for such provisions.”

The effect of banning fee shifting bylaws on Delaware’s dominance might only be marginal, but Delaware has kept its position at the top of the corporate law heap by responding to even marginal threats.

So what’s in Delaware’s best interest? If you’re a Delaware taxpayer, the answer is clear: Endorse and validate fee shifting bylaws.

The Interest Group that Matters

My late friend Larry Ribstein once observed that:

Professors Jonathan Macey and Geoffrey Miller argue that lawyers may be the group that most influences Delaware corporate law. Delaware lawyers have all of the attributes of a politically powerful interest group: they are already organized into bar associations and maintain an advantage over other groups because they continually learn about the law as a consequence of their profession; they are centered in a single city (Wilmington), in a small state and, therefore, can communicate with each other at minimal costs; and they provide an important service for legislators in drafting legislation on complex commercial and corporate matters.

Delaware lawyers, in essence, are the Delaware legislature, at least insofar as corporate law is concerned. Delaware has one of the three smallest legislatures in the country. Its legislative committees are virtually inactive. Most striking, however, is that few of Delaware's legislators are lawyers. Such legislators are likely to rely on lawyers to supply sophisticated commercial and business legislation. As a result, virtually all of Delaware corporate law is proposed by the Delaware bar, and the bar's proposals invariably pass through the legislature.[6]

The Macey and Miller article to which Ribstein refers exhaustively reviews the various interest groups that might influence the production of Delaware law and conclude that “the bar is the most important interest group within this equilibrium. Thus, the rules that Delaware supplies often can be viewed as attempts to maximize revenues to the bar, and more particularly to an elite cadre of Wilmington lawyers who practice corporate law in the state.”[7] They further explain that:

The Delaware bar is interested in maximizing one specific portion of the indirect costs of Delaware incorporation—fees to Delaware lawyers paid for work on behalf of Delaware corporations. These legal fees are functionally related to the number of charters in Delaware in the sense that the expected legal revenues will increase as the number of corporations chartered in the state increases. Accordingly, the bar would tend to favor low franchise fees, because keeping the fees low will tend to increase the number of Delaware corporations. But the bar could also benefit from legal rules that increase the amount of expected legal fees per corporation, even if such rules, by imposing additional costs on Delaware corporations, reduced the absolute number of firms chartered in the state. If the legal fees gained exceed the fees lost by deterring Delaware incorporation, the bar would prefer to adopt rules that did not serve the interests of the other interest groups within the state. In this respect, the bar's interests are opposed to the interests of all other groups.[8]

How then would fee shifting bylaws affect the income of Delaware lawyers? It seems fair to assume that there will be a net reduction in shareholder litigation as a result of fee shifting bylaws becoming widespread. As Kevin LaCroix observed, quoting the Delaware Supreme Court’s ATP Tour decision:

Fee shifting provisions “by their nature, deter litigation.”

This would adversely affect not just plaintiff lawyers, but also defense lawyers. After all, fewer lawsuits mean less work for defense litigators too:

The bar … does benefit from increasing the amount of litigation and accordingly would tend to favor litigation-increasing rules …. Delaware could stimulate litigation [by making] litigation cheaper by reducing the costs to the parties, especially plaintiffs who make the initial choice of forum.[9]

Both sides of the litigation bar thus have a strong interest in banning fee shifting bylaws. Such bylaws would raise plaintiff costs, deterring lawsuits, reducing fees for all litigators.

Widespread adoption of fee shifting bylaws could also adversely affect transactional lawyers. Litigation risk is a major driver in the level of advisory work. As Jonathan Macey observed, for example, Delaware case law has given corporate directors “significant incentives to cloak their decisions in a dense shroud of process and to take other steps that will generate high fees for lawyers, investment bankers, and other advisors (who, incidentally, are precisely the same people who advise companies to incorporate in Delaware in the first place).”[10] Fee shifting bylaws would reduce those incentives and thus decrease the demand for advisory work by lawyers.

All corporate lawyers—litigators and transactional—have a strong incentive to oppose fee shifting bylaws. Hence, it was no surprise that the Delaware legislature—dominated in this area by the Delaware bar—leaped to ban such bylaws. The business groups that favor fee shifting bylaws were able to delay that action. But the final decision remains pending.

Update: You should check out Brett McDonnell's comment below. Also consider the point being made by Usha Rodrigues:

Certainly litigators want litigation. But deal lawyers don't want it--at least, not this particular kind of litigation. Indeterminacy over doctrinal areas like good faith is good for transactional types as well as litigators, because it gives them more nuances and risks to have to explain at length to boards as they advise on various types of action. The type of fee-shifting bylaw we're discussing, in contrast, is bad for deal lawyers--at least, if you think, as Steve does, that

There is a serious litigation crisis in American corporate law. As Lisa Rickard recently noted, “where shareholder litigation is reaching epidemic levels. Nowhere is this truer than in mergers and acquisitions. According to research conducted by the U.S. Chamber Institute for Legal Reform, lawsuits were filed in more than 90% of all corporate mergers and acquisitions valued at $100 million since 2010.” There simply is no possibility that fraud or breaches of fiduciary duty are present in 90% of M&A deals. Instead, we are faced with a world in which runaway frivolous litigation is having a major deleterious effect on U.S. capital markets.[23]

If these suits amount to nothing more than a litigation tax on deals, then they discourage deals. And that's bad for deal lawyers.

Conclusion

The debate over fee shifting bylaws will come to a head in the Delaware legislature early in 2015. It is shaping up to be a fascinating test of whether the Delaware bar’s grip on Delaware corporate law will be strong enough to overcome the incentives Delaware legislators have to remain the most attractive state of incorporation. Because endorsing fee shifting bylaws is the right answer from a policy perspective, those of us who do not have a dog in that specific fight can only hope that the latter position prevails. To end with a classic cliché, however, only time will tell.